Harbour lights: Gothenburg is the largest port in Scandinavia
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On the roof of Gothenburg’s newest hotel, two hives of bees are busy processing the nectar from the late summer flowers 25 stories below. They were installed by executive chef Krister Dahl, who wants their honey for his breakfast recipes and home-brewed ale. His new restaurant has already been voted Sweden’s best by Dagens Industri, the business daily, and he is focused on gaining his first Michelin star.

The twin Gothia Towers have been a feature of the city skyline since 2001. Since then, an additional five-star “hotel within a hotel” has also been added atop the second tower; the Upper House includes a spa, luxury suites and a glass-bottomed outdoor pool that juts vertiginously beyond the 19th floor. But in December, a third tower will open, elevating the hotel into the elite club of Europe’s five largest, with 1,200 rooms.

Even in a country that has seen Europe’s strongest economic growth since the 2008 crash, this might seem a big bet. But bees or no bees, the hotel is buzzing.

“I would say it’s not a gamble, but high ambition,” says the hotel’s new chief executive Daniel Stenbäck, of the 1.2bn SEK ($158m) invested in the new tower. “We are aiming to be one of the main venues in Europe for conventions and corporate events – but with a distinct Scandinavian touch.”

The hotel stands at the head of Gothenburg’s Evenemangstråket, or events thoroughfare, along which a football stadium, rock concert hall, a giant science centre, cinema multiplex and Scandinavia’s largest amusement park are all within walking distance. This unique concentration of venues inside the city means it comes alive when thronged with large numbers of people; the hotel (the third-largest in Scandinavia) is actually an integral part of the Swedish Exhibition and Congress Centre, which attracts a million visitors every year.

Executive chef Krister Dahl of Gothenburg’s Upper House restaurant; his cooking has drawn international epicures

The Gothia Towers expansion is inspired by the business models of similar complexes in the US and Asia, says Stenbäck. Billboards for the hotel’s new theatre declare that the headline act – magician Joe Labero – is bringing Gothenburg “closer to Las Vegas”. “The second-tier city is a trend right now,” Stenbäck continues. “Everybody has already been everywhere, they want to find the next places to be.”

Max Barclay, head of international business at Stockholm-based commercial property specialists Newsec, agrees that investors have started to look at the secondary cities in markets such as Sweden’s, where there is a shortage of properties in the capital’s central business district (CBD).

“In recent years, the focus has been on the so-called core locations in Stockholm, the best buildings in the best locations, offices with good tenants and long leases,” says Barclay. “But because of a lack of product and low yields, the interest has been more focused on the outskirts, and investors are also looking at other, growing cities. That’s where most of the deals are being made now.”

Sweden’s commercial property scene stands out as producing big numbers for such a small country. This is the fourth-largest market in Europe after the UK, Germany and France, thanks to high liquidity and a wall of money from domestic institutions trying to raise their exposure to a sector with high, stable returns.

Pull up a chair: the ambitious redevelopment of Gothia Towers is a sign of Scandinavia’s confidence, as overseas trade comes to the table

Over the past year, moreover, the Swedish krona has fallen against the dollar, euro and sterling, thus lowering a major barrier to foreign interest. In 2006-07, more than half the investment in Swedish commercial property came from overseas, as the country’s high transparency, liquidity and good fundamentals gave it a reputation for being a safe haven. Since then, however, many investors have had problems on their home turf.

As a result, foreign investors who came here in that last wave of interest have become sellers to the big domestic institutions. Since 2009, the proportion of property investments made by foreigners has been between 10 and 20 per cent, compared with 40-60 per cent before the financial crisis, according to Newsec research. “For the first half of 2014, foreign investment in commercial property is up to 15 per cent,” says Barclay. “This is still low, but there are signs of a trend and the possibility for deals is increasing, with the currency being one of the factors.”

Interest rates are at a historic low, while alternative investments such as bonds or the stock market are volatile or offer low returns. Bank finance has also loosened up for larger “platform” deals, says Daniel Gorosch, managing director of property brokers JLL in Sweden. “There are signs of 2007 again,” he says, pointing to a trend that began with the acquisition by Starwood Capital, a US private equity firm, of seven major retail centres in Swedish cities for $590m a year ago.

“We also know that other large deals are cooking,” says Gorosch, although Starwood Capital declined to comment for this article.

From annual volumes of 60bn-80bn SEK in commercial property over the past five years, 2013 saw an increase to almost 100bn SEK, while this year Newsec expects 120-130bn SEK – a significant jump.

Most business is still in the residential market, but with almost 30 per cent in the office segment there are signs of investors accepting higher risk to get better returns, as the drought in CBD locations continues. In one of the few CBD deals, Germany’s Allianz Real Estate sold a prime collection of central Stockholm offices, shops and apartments to Sweden’s AMF last year for €180m. There is a record low vacancy in Stockholm offices – 3 per cent in the CBD and 9 per cent in the city overall, says Gorosch. The combination of the lack of available land with very tough regulations make it almost impossible to build new assets. 

Scandinavia has a combined population of just 26m people, so the obvious way into the market is through its capital cities, especially Stockholm, where the presence of large legal, consulting and accountancy firms makes it easier to do business. “You go to the largest place and start from there,” says Barclay. “The chances of making a mistake in Stockholm are also much less because of the strong economic and population growth in the city, even though some micro areas should be avoided – you need to do your homework.”

Industry insiders talk of ‘signs of 2007 again’ – this Stockholm mall was bought by US firm Starwood last year, in a deal worth $590m

In the biggest deal by a foreign investor this year, New York-based Invesco Real Estate purchased a prime office property on Kungsholmen island in central Stockholm; it paid Swedish construction group Skanska around a billion krona in May, and managed to circumvent the strong domestic competition by doing the deal off market.

“We had been monitoring it for some time, waiting for Skanska to make up its mind about whether it wanted to sell,” says Joen Siggelin of Scius, Invesco Real Estate’s local operating partner in the Nordics. “When you come to the core segment, the supply of good quality stock is an issue, so when things do become available they can quickly become expensive.”

Invesco is bullish on Sweden, says Siggelin, and although the weaker krona makes it more challenging to achieve returns on office properties, it has an appetite for more – on average, the company has been doing a deal a year since the market recovered in 2009. Making the Skanska deal off market meant that Invesco could avoid a competitive bidding situation. “Of course there’s a bit of luck involved,” says Siggelin. “You have to make that one call on the right day at the right time, when they are in a good mood!”

From afar, Scandinavia might look like a single property market, but up close there is plenty of diversity. While Invesco has looked closely at Finland and Denmark, it has confined its investments to Sweden, paying less attention to Norway because it is outside the EU. Norway’s oil and gas money also means foreign investors have a tough time competing with domestic investors.

The economies of Norway and Sweden are doing well, but in eurozone member Finland it’s a very different picture, with GDP falling since 2012 and serious jitters over Ukraine and Finland’s bigger neighbour to the east. “You can look at this as a risk or an opportunity,” says Barclay. “But you should not expect quick turnrounds – it could take a while for the market to recover.”

Denmark’s economy is slowly recovering, although foreign investor interest is still mainly confined to Norwegians and Swedes, and residential property. One investor to look outside Sweden is WP Carey, a US real estate investment trust with $10bn under management, which places a priority on long-term security of income rather than “flipping” assets for a quick profit.

In August, it purchased the headquarters of French oil company Total in Norway’s oil capital Stavanger for €86m; in February it paid a similar amount to acquire the headquarters of Siemens, a German engineering company, in Oslo. WP Carey also made steady investments in Finland between 2001 and 2008 totalling some €350m.

“As an investor, these countries have strong fundamentals,” says WP Carey director, Arvi Luoma, who focuses on European acquisitions for the company. “They inherently provide a lot of comfort and are natural hedges to the other economies we consider.”

The company had been looking at Norway for a long time, wanting to get in, but it was “an insular market”, says Luoma, with most property traded internally among local funds and institutions, with thin margins.

It’s about being at the right place at the right time, and taking advantage of a situation, he says. Last year some of the big Norwegian funds were net sellers to reduce their real estate exposure, which created opportunities. Developers also like to bring in international money – it adds kudos, a different sort of capital.

“We go where others don’t want to,” Luoma says of WP Carey’s investments in Norway. “We feel that the market has perhaps mispriced the risks and undervalued the prospects.”

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